Microsoft and Nokia have signed a definitive agreement on Windows Phone production, the two companies announced on Thursday. The agreement solidifies the strategic alliance Microsoft and Nokia entered in February.

The announcement came just as Nokia released its Q1 earnings. On Thursday, Nokia reported profit of 344 million Euros (or $501 million) returned to its equity owners. That figure represents a 1.4 percent decline from the 349 million Euro ($508 million) profit of the prior first-quarter period.

"In the first quarter, we shifted from defining our strategy to executing our strategy," Elop explained in a statement released with Nokia's earnings report. "On this front, I am pleased to report that we signed our definitive agreement with Microsoft and already our product design and engineering work is well under way."

Nokia had announced organizational changes and a shuffling of executive personnel in February, including the formation of new Smart Devices and Mobile Phones business units. The company plans to develop its flagship smartphone product line primarily based on Microsoft's proprietary Windows Phone operating system instead of Nokia's open source Symbian mobile OS.

The agreement with Microsoft announced in February was rumored to entail more than $1 billion in cash payments from Microsoft to Nokia, even though Elop had said that no cash transfers would be involved to start the deal. However, a joint press release from Microsoft and Nokia issued Thursday explained that "in recognition of the unique nature of Nokia's agreement with Microsoft and the contributions that Nokia is providing, Nokia will receive payments measured in the billions of dollars." No definitive figure was provided.

Nokia's strategic move will lead to the loss of employee jobs. In today's financial earnings statement for the first quarter, Nokia described a plan to cut operating expenses by 1 billion Euros ($1.4 billion) through 2013, mostly through personnel cuts.

"Due to the transition process, generally all current employees can stay on the payroll through the end of the year 2011, even those possibly impacted by the reductions," Nokia's earnings statement explains (PDF).

Microsoft and Nokia claimed in a blog post that they are focused on developers and plan to make the Windows Phone developer registration "free for all published Nokia developers" in the first year. They even claim that users can expect "new features for Symbian and new capabilities for Windows Phone devices," along with business applications that tap into Microsoft's cloud-based services.

The aim for the companies is to see volume shipments of Nokia smartphones running the Windows Phone mobile OS starting in 2012, with a first delivery of phones expected as early as sometime this year, according to the blog. However, Nokia's earnings statement suggests that it will take until 2013 for the transition using the Windows Phone OS to be completed.

"We expect the transition to Windows Phone as our primary smartphone platform to take about two years," Nokia's 1Q 2011 financial statement explains. "During the transition, we will continue to leverage our investment in our Symbian platform for the benefit of Nokia, our customers and consumers, as well as developers."

A successful partnership with Nokia would give Microsoft a huge boost in the consumer smartphone OS market, where Microsoft is seen to be floundering. Analyst firms IDC and Gartner both have predicted that Windows Phone use -- based primarily on Nokia's Windows Phone adoption plans -- could push Microsoft's smartphone OS marketshare to the No. 2 spot, after Android, by 2015. Gartner expects Symbian use to drop to near zero use levels by that same time period.

Meanwhile, apart from its Nokia partnership, Microsoft is preparing to launch an update called "Mango" to Windows phones sometime next month. This major update will add the IE 9 browser and Windows Live SkyDrive access, as well as integration with Twitter.

An earlier minor update to Windows phones, code-named "NoDo," is being pushed out to current Windows phone users, although the timing depends on the schedules of mobile phone device manufacturers and mobile service providers. AT&T began issuing the NoDo update to Samsung Focus and LG Quantum users in the United States on Tuesday.